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Resilience in Family Enterprises

Lessons on Longevity from Emerging and Frontier Markets

ACADEMY OF MANAGEMENT SYMPOSIUM, AUGUST 2017

Many of today’s iconic family enterprises were forged in the fires of catastrophic events like the Napoleonic Wars (e.g. Rothschilds), the Great Panic of 1873 (e.g. Kohler, Follett), WWI (e.g. BMW, Ford) and the Great Depression (e.g. JR Marriott, Brown Forman). Conditions in these volatile environments were similar in many respects to contemporary emerging and frontier markets – where weak institutions, imperfect markets, asymmetric information, and greater volatility are the norm. Both contexts shed light on our principal research questions regarding the resilience of family enterprises that thrive under conditions of chronically elevated risk. Moreover, the bulk of the world’s wealth and economic activity for the foreseeable future will be generated in the developing world (Atsmon et al, 2012), precisely where family enterprises represent the highest share of output (Björnberg et al, 2014). Consequently, studying the response of family enterprise systems to chronic market dysfunction and elevated risk can provide useful insights into organizational resilience and has significant implications for economic development.

Our Study

Our research draws on literature about the role of institutional voids in shaping social and organizational behavior (e.g. Khanna & Palepu, 2010; Atsmon et al, 2012) as well as research on biological and ecological resilience in extreme environments (e.g. Pennisi, 1997, Walker & Salt, 2006). In particular, we borrow the following definition of resilience as “a measure of the persistence of systems and of their ability to absorb change and disturbance and still maintain the same relationships between populations or state variables” (Holling, 1973). Our conceptual model of organizational resilience is based on decades of clinical experience advising family enterprises in these environments as well as confidential interviews with leaders from 30 successful multi-generational family companies operating in countries that score below the 50th percentile in the World Bank’s Political Stability and Absence of Violence Index.[1] We have also assembled a database of publically available information from over 200 family companies operating successfully in developing markets and intend to conduct a larger quantitative survey to test the validity of our emerging hypotheses. Our research suggests that family-controlled firms in these environments rely on six key elements of organizational resilience that position them for longevity, though this advantage doesn’t always translate into developed markets where trust is greater, institutions are stronger, and competition is fiercer (Khanna & Palepu, 2010).

The Importance of Family

Drawing on research from Nooteboom (2007) and Khanna & Palepu (2010) among others, it became clear that “institutional voids” – or the absence of trust in public markets – represent a critical structural difference between developed and developing markets. In these environments, public infrastructure and government institutions are often weak, inefficient, and corrupt (Huntington, 1968; Levitsky & Murillo, 2009; Robinson & Acemoglu, 2012) and markets for capital, goods and talent are limited and inefficient (Khanna & Palepu, 2010). In this context, trusted family networks -- more than impersonal alternatives like foreign multinationals, local firms with diffused ownership, or even the state itself -- take on particular importance, as they have throughout most of human history (Weber, 1919; Fukuyama, 2011; Hariri, 2014). Familial networks help to compensate for the risk of loss, deceit or harm when dealing with strangers in business or government affairs, essentially lowering transaction costs and simplifying operational processes. This helps to explain the powerful bias toward familial networks of reciprocal commercial interest that are observed throughout the developing world and exemplified by guanxi in China, blat in Russia, compadrazgo in Latin America, and wasta in the Arab world. It also vindicates some of the earliest sociological observations by Aristotle in Politics and Confucius in the Analects about the nuclear family as a fundamental building block of human civilization, particularly in the absence of developed or stable institutions.

The Importance of Resilience

In addition to conventional competitive, organizational and institutional pressures, family enterprise systems operating in these environments also face frequent existential threats such as war, dictatorships, massive economic shocks, rampant corruption and catastrophic natural disasters. Drawing on our research and clinical experience, we hypothesize that the structures and processes accounting for the resilience and longevity of family enterprises mimic many of the properties associated with biological and ecological systems that survive and even thrive in similarly extreme conditions (Pennisi, 1997, Walker & Salt, 2006; Horikoshi & Grant, 1998). Biologists and ecologists have been studying resilience in the face of extreme risk for decades, beginning with Holling’s landmark paper Resilience and Stability of Ecological Systems in 1973. Inspired by this work, we reviewed literature for connections between biological and organizational resilience, while remaining conscious of the risks and limitations of adapting biological metaphors for organizations raised by Young (1988) among others. We also reviewed literature from the field of organizational ecology (Hannan & Freeman, 1989; Baum et al, 2006) – with a particular focus on reliability – as well as recent research on organizational resilience (Reeves, 2011; Rodin, 2014). Taken together, these insights shaped our understanding of how family enterprises not only survive but often thrive in these volatile environments.

Over the course of our data gathering and particularly during the interviews, we identified six distinct elements of organizational resilience that connect to this broader literature. Descriptions of these elements are included in Table 1 below, along with examples from the literature on biological resilience. We have also included examples of how these elements apply both to historical examples of resilience in previously volatile environments as well as contemporary examples from emerging and frontier markets where conditions remain similarly volatile.

TABLE 1: SIX ELEMENTS OF RESILIENCE IN FAMILY ENTERPRISE SYSTEMS

Our research suggests that the ability of these firms to adapt is a direct byproduct of the fact that they are owned and managed by enterprising families. In fact, family-controlled firms that survive frequent existential threats have built resilience into their organizational DNA. For instance, a business family’s values, commitment to community and views on security often anchor organizational culture, strategy and decision-making in the face of extreme volatility. Their supply chains are often filled with trusted relatives who will go the extra mile to support a shared economic activity. They tend to be more conservative in the management of their balance sheet, and are more likely to invest directly in critical infrastructure like roads, bridges, power utilities, telecommunications networks, and even schools and hospitals, rather than rely on public initiatives to support their survival and growth. Family networks also provide a reliable and diverse source of funding, deal-making and government relations in the absence of mature markets for capital, information and political representation. Together, these “natural” traits help to explain the prevalence of family firms in lower-trust environments, as well as the critical role they play addressing market failures and economic development.

Future Research Possibilities / Implications

In the next phase of our research, we plan to conduct a quantitative survey of 300 family-controlled companies from around the world, with sufficient representation in each of five geographic clusters outlined above to control for regional effects. If possible, our hope is that this will form the nucleus of a broader research program on building resilient family enterprise systems through which we can study a broad array of institutional and organizational factors. In particular, we are interested in developing a deeper understanding of how institutions shape critical elements of organizational design including strategy, tactics, leadership and governance. We are also keen to explore how family firms manage transitions through various states of volatility (e.g. high to low, low to high) as their institutional context evolves. Additionally, we are interested in developing greater links with research on organizational ecology and biological resilience and how these structures evolve over time to support greater longevity. Finally, we will continue to pursue clinical interviews to ensure that our research effort captures the more subtle details of actual practices and behavior (for instance, as they relate to more sensitive topics like corruption). We believe that a multi-method approach is likely to yield a more comprehensive picture of how these systems survive and thrive.

SEARCH / EXPLORAR

LGA advises families on all aspects of family enterprise, often as they face complex generational transitions. Our clients include Fortune 500 firms, mid-sized companies, and some of the oldest family businesses in the United States and Canada, Latin America, Asia, Europe, and the Middle East. Learn More »